Chapter 14 PDF - Transportation in a Supply Chain

Here is the transcription of the provided images into a structured markdown format: # Chapter 14 ## Transportation in a Supply Chain ### Learning Objectives After reading this chapter, you will be able to: 14.1 Understand the role of different transportation modes in a supply chain 14.2 Discus...

Here is the transcription of the provided images into a structured markdown format: # Chapter 14 ## Transportation in a Supply Chain ### Learning Objectives After reading this chapter, you will be able to: 14.1 Understand the role of different transportation modes in a supply chain 14.2 Discuss the role of infrastructure and policies in transportation 14.3 Identify the relative strengths and weaknesses of various transportation network design options. 14.4 Understand some success factors in a responsive network for same-day delivery. 14.5 Evaluate trade-offs that shippers need to consider when designing a transportation network. 14.6 Design tailored transportation networks in a supply chain In this chapter, we discuss the role of transportation within a supply chain and identify trade-offs that must be considered. Our goal is to enable managers to make informed decisions about transportation strategy and design, and operational decisions with an understanding of pros and cons ## 14.1 Understand the role of different transportation modes in a supply chain ### Transportation Modes and their Role in a Supply Chain Transportation refers to the movement of product from one location to another as it makes its way from the beginning of a supply chain to the customer. Transportation is an essential supply chain driver because products are rarely produced and consumed in the same location. Transportation is a significant component of the costs incurred by most supply chains. According to the Bureau of Transportation Statistics (BTS), "over 19 billion tons of freight, valued at $13 trillion, was carried over 4.4 trillion ton-miles in the United States in 2002." Only three sectors—housing, health care, and food—contributed a larger share to the gross domestic product (GDP) than transportation. Transportation-related jobs employed nearly 20 million people in 2002, accounting for 16 percent of U.S. total occupational employment. The role of transportation is even more significant in global supply chains. According to the BTS, the U.S. freight transportation network carried export and import merchandise worth more than $2.2 trillion in 2004, an increase of 168 percent from $822 billion in 1990. During the same period, the ratio of exports from and imports into the United States to the GDP increased from 12 percent to 21 percent. Any supply chain's success is closely linked to the appropriate use of transportation to support its competitive strategy. Firms should design functional incentives that help achieve this goal. Historically, the transportation function within certain firms has been evaluated based on the extent to which it can lower transportation costs. Such a focus leads to decisions that lower transportation costs but hurt the level of responsiveness provided to customers and may raise the firm's total cost. IKEA, the Scandinavian home furnishings retailer, is an example of a company whose transportation strategy supports its competitive strategy. IKEA has a global network primarily on the basis of effective transportation. Sales for the year ending in August 2013 reached 29.2 billion euros. Its strategy is to provide good-quality products at low prices. IKEA works hard to find the least expensive global source for each of its products. Modular design of its furniture allows IKEA to transport its goods worldwide much more cost-effectively than a traditional furniture manufacturer. Seven-Eleven Japan uses a responsive transportation system that replenishes its stores several times a day so the products available match customers' needs. Products from different supplies are aggregated on trucks according to their need to help achieve frequent deliveries at a resonable cost. Supply chains also use responsive transportation to centralize inventories and operate with fewer facilities. For example, Amazon relies on package carriers and the postal system to deliver customer orders from centralized warehouses. McMaster-Carr uses ground transportation and package carriers to provide next-day delivery of a wide variety of MRO products to about 90 percent of U.S. businesses from five distribution centers. **The shipper** is the party that requires the movement of the product between two points in the supply chain. **The carrier** is the party that moves or transports the product. Beside the shipper and the carrier, two other parties have a significant impact on transportation: (1) the owners and operators of transportation infrastructure such as roads, ports, canals, and (2) the bodies that set transportation policy worldwide. Supply chains use a combination of the following modes of transportation: - Air - Package carriers - Truck - Rail - Water - Pipeline - Intermodal Commercial freight activity in the United States by mode in 2011, along with the value added by each mode to GDP in 2009, are summarized in **Table 14-1**. Before discussing the various modes, it is important to highlight some important trends in the U.S Economy. **Table 14-1 Transportation Facts** *Source: Data from Freight Shipments Within the U.S. by Mode, Bureau of Transportation Statistics, Retrieved April 19, 2017.* #### Air Airlines have three cost components: (1) a fixed cost of infrastructure and equipment, (2) cost of labor and fuel that is independent of the passengers or cargo on a flight but is fixed for a flight, (3) variable cost that depend on passengers or cargo carried. Air carriers offer a fast and fairly expensive mode of transportation for cargo. Small, high-value items or time-sensitive emergency shipments that must travel a long distance are best suited for air transport. Air carriers normally move shipments under 500 pounds, including high-value but lightweight high-tech products. In 2002, the goods U.S businesses moved by air were valued at $75,000 per ton. Key issues that air carriers face include identifying the location and number of hubs, assigning planes to routes, setting up maintenance schedules for planes, scheduling crews and managing seat or cargo space availability at different prices #### Package Carriers Package carriers are transportation companies such as FedEx, UPS, and U.S Postal Service, which carry small packages ranging from letters to shipments weighing about 150 pounds. They use air, track and rail to transport time-critical smaller packages. Package carriers are expensive and cannot comprare with LTL carriers on price For large shipments. Package carriers are the preferred mode of transport for online businesses as it Amazon and companies such as W.W Grainger and McMaster-Carr that sent sent small packages to customers. #### Truck In most of the world, trucks carry a large fraction of the goods moved. The trucking industry consists of two major segments: truckload (TL) or less than truckload (LTL). Trucking is more expensive than rail but offers the advantage of door-to-door shipment and a shorter delivery time. It also has the advantage of requiring no transfer between pickup and delivery. #### Rail In 2002, rail carried about 3 percent of U.S shipments by value, 10 percent by weight, and more than 30 percent of total tom-miles. These figures relfect the use of rail to move commodities over large distances. Any idle time, once a train is powered, is expensive becausr labor and fuel costs are incurred even though trains are not moving. #### Water Water transport, by its nature, is limited to certain areas. Within the United States, water transport takes place via the inland waterway system ( the Great Lakes and rivers) os coastal waters. Water transport is ideally suited for carrying large loads at lost cost. #### Pipeline Pipeline is used primarily for the transport of crude petroleum, refined petroleum products and natural gas. In the United States, pipeline accounted for about 16 percent of total ton-miles in 2002. #### Intermodal Intermodal transportation is the use of more than one mode of transport to move a shipment to its destination. Most shippers use a combination of modes across their supply chain depending upon the product value and sales volume along with the desired level of responsiveness. ### Summary of Learning Objective 1 Transportation decisions affect supply chain profitability and influence both inventory and facility decisions within a supply chain. The various modes of transportation include water, rail, truck, air, pipeline, intermodal, and package carriers. Water is typically the least expensive mode but is also the slowest, whereas air and package carriers are the most expensive and the fastest. Rail and water are best suited for low-value, large shipments that do not need to be moved in a hurry. Air and package carriers are best suited for small, high-value, emergency shipments. Intermodal and TL carriers are faster than rail and water but are somewhat more expensive. LTL carriers are best suited for small shipments that are too large for package carriers but much smaller than needed for a TL. ### Test Your Understanding 14.1.1 Transportation plays a key role in every supply chain because O products are normally produced and consumed in the same location. **O products are rarely produced and consumed in the same location.** O the cost of transportation is inconsequential. O transportation is not a factor in determining profitability. 14.1.2 The _________ is the party that requires the movement of the product between two points in the supply chain. O carrier O producer **O shipper** consumer ## 14.2 Discuss the role of infrastructure and policies in transportation ### Transportation Infrastructure and Policies Roads, seaports, airports, rail, and canals are some of the major infrastructural elements that exist along nodes and links of a transportation network. In almost all countries, transportation infrastructure is viewed as a public good for which the government plays a significant role in both building and maintenance. Before considering policy questions related to transportation infrastructures, it is worth looking at the history of rail and road infrastructure in the United States to see some of the issues involved. We summarize some of the discussion by Ellison (2002) of the history of railroads and regulation in the industry. The construction of railroads in the United States occurred rapidly during the 1850s. The railroads were privately owned but were built with significant government subsidy, often in the form of land grants. From these examples, it seems reasonable that the government must either own or regulate a monopolistic transportation infrastructure asset. A vehicle driver bases his or her decision to use a highway on the cost and benefit of doing. **Figure 14-1 Impact of Average And Marginal Cost on Vehicle Flow** A graph shows impact of average marginal cost on vehicle flow with the price of trip on the y axis and vehicle flow rate on the x axis. From the perspective of the public, however, it is more appropriate to consider how each additional motorist impacts the total cost, not just the average cost. Observe that an additional motorist increases the average cost $3f$ by a small amount but increases the total cost $3f^2$ across all motorist by a much larger amount. ### Summary of Learning Objective 2 Infrastructure such as ports, roads, and airports has a significant impact on transportation. Given its inherent monopolistic nature, most transportation infrastructure requires public ownership or regulation. In the case of public ownership, pricing based on average cost leada to overutilization and congestion. It is important to use some form of congestion pricing under which users area forced internalize the increase they cause in network cost. ### Test Your Understanding 14.2.1 In almost all countries, roads, seaports, airports, rail, and canals have this in common. **○ They were built and/or managed by the government.** ○ They are located near the water. ○ They are the source of most of the tax revenue for municipalities. ○ They are staffed by foreign nationals. 14.2.2 Which of these statements about use fees for highway is most accurate? ○ A flat rate results in lower use by most individuals. **○ A flat rate results in higher use by most individuals.** ○ A flat rate has no impact on use by most individuals. ○ A fee based on congestion results in higher use by most individuals ## 14.3 Identify the relative strengths and weaknesses of various transportation network design options. ### Design Options for a Transportation Network The design of a transportation network effects the performance of a supply chain by establishing the infrastructure within which operational transportation decisions regarding scheduling and routing are made. Three basic questions need to be considered when designing a transportation network between two stages of a supply chain: 1. Should transportation be direct or through an intermediate site? 2. Should the intermediate site stock product or only serve as a cross-docking location? 3. Should each delivery route supply a single destination or multiple destinations? Based on the answers to these questions, the supply chain ends up with a variety of transportation networks. #### Direct Shipment Network to Single Destination With this network, the buyer structures transportation so that all shipments come directly from each suppler to each buyer location. The origin and destination of each shipment is specified. The image is that of suppliers connected to buyer locations as a direct shipment network to a single destination. #### Direct Shipping with Milk Runs A milk run ia a route on which a truck either delivers product from a single supplier to multiple retailers or goes from multiple suppliers to a single buyer location. In direct shipping with milk runs, supplier delivers directly to multiple buyer locations on a truck or truck picks up deliveries destined for the same buyer location. The image is that of suppliers connected to buyer locations with milk runs from multiple suppliers or to mutiple buyer locations. ### All Shipments via Intermediate Distribution Center with Storage Under this optin, product is shipped from suppliers to a central distrubtion center. The image is that of suppliers connected to buyer locations with all shipment via DC. ### All Shipment via Intermediate Transit Point with Cross Docking Under this option, suppliers asend their shipments to an intermediate transit point (which could be a DC) Walmart has used cross-docking successfully to decrease inventories in the supply chain without incurring excessive transportation cost. ### Shipping Via DC Using Milk Runs As shown in **Figure 14-5** , milk runs can be uded a DC if lots sizes to be delivered to each buyer location area small. With the right degree of coordination suitable routing and scheduling. The online grocer Peapod uses milk runs from DC when making their home deliveries to help reduces transportation costs for small shipments. OshKosh B'Gosh, a manufacturer of children's wear, has uded this idea to virtually eliminate LTL shipmentsfrom it's DC in tennesse to retail stores. ### Tailored Network The tailored network option 7 is a suitable combination of previous options that reduces the cost and improves the responsiveness of the supply chain. **Table 14-2 Pros and Cons of Different Transportation Networks** **Table 14-2** summarizes the pros and cons of various transportation network options #### Example 14-1 Selecting a Transportation Network A retial chain has eight stores in region supplied from 6 supply sources. Trucks have a capacity of 40,000 units and cost $1,000 load plus $100 per deliver. The cost to holding one unit in inventory, at retail for a year is $0.20. The vice president of supply chain is considering whether to shipping from supppliers to retail stores or setting up mill runs from suppliers to retail stores. Network 960,000 units? Or 120,000 units. **Analysis:** We first analyze the analysis direct shipping nerwork and assume that full truckloads will be shipped from supplies to trail store. In is case we having the folliwng: Batch Size = 40,000 Units Number of Shipmentes/Year = 960,000/40,000 = 24 Annually Truckling cost 24 x 1,00x4x8 = $844,000 Average inventory at each Store 40,000/2= 20,000 units Annual Inventory code for direct Network =12x0x4x=$120000 Total Annual cost for direct Network = $072.000 Low we analyze the network in which suppliers into real scores milk run increase the transportation store has to hold we provide a detail analysis for the instance of suppliers running. This analysis shows that when demand per product per store is 960,000 units, the direct network is cheaper than running milk runs with two stores per route. ### Test Your Understanding 14.3.1 Using cheaper modes of transportation for shipping leads to: ○ shorter lead times and smaller minimum shipment quantities. ○ shorter lead times and larger minimum shipment quantities. **○ longer lead times and smaller minimum shipment quantities.** ○ longer lead times and larger minimum shipment quantities. 14.3.2 The most operational decision related to transportation in a supply chain is" ○ Minimizing cost of transportation **○ Maximizing profitability of the supply chain** ○ The routing and scheduling of deliveries ○ Reducing level of cycle inventory ## 14.4 Understand some success factors in a responsive network for same-day delivery ### Mumbai Dabbawalas. A Successful Same Day Delivery Network The Mumbai dabbawalas, however, have successfully run such a distribution systems for more than century while including reverse logistics: all empty luchboxes are delivered back home after lunch. Every working morning abot 5,000 dabbawalas use milk runs with bicycles to pick up lunches from about 30 homes. Each home hasa a time window of a coupke of mirnites for the pickup, and the schedule is rereated every working dat. The milk run ends at the local train station. Beside the discipone and commintment, three factora fvcilitare rge succeess of the dabba walu distribution network: 1 Low uncertainty of demand 2 Temporak aggrecation of demand 3 USe of transportation resources when they The pic up and delivery points for the dabba-walus are fixed and not do Vary from day to day. this predictability of demand altows them design optimak wilk runs as that are ropeated daily. The dabba walus use the Mumbai rawlay systeem during Times That Are Off peak ### Test Your Understanding 14.4.1 The Mumbai dabbawalas have a transportation network that in beginning of each day is described as **O a Milk Run** O direct shipping to a single destination O a tailored network O A Direct shipping from source to customer 14.4.2 The Mumbai dabbawalas have transportation network that takes advantage of O a Low Uncertainty Of Demand O temporal Aggregation OF Demand ## 14.5 Evaluate trade-offs that shippers need to consider when designing a transportation network ### Trade Offs in Transportation Design The costs of coordinating operations are generally hard to quantify. Shippers have to evaluate for potential costs and revenue and how they are impacted by a choice in transportation. Some trade-offs when making transportation decisions are: - Transportation and inventory cost trade-off - Transportation cost and customer responsiveness trade-off #### Transportation and Inventory Cost Trade Off The major supply chain decisions involving this trade-off are - Choice of transportation mode - Inventory aggregation Fast modes of transportation are perferred for products with a high value-to-weight ratio (smartphone). The goal is to reduce inventories while cheaper modes are preferred for products with a small value-to-weight ratio(furniture) for which reducing transportation cost is important. The table that follows describes some trade offs when one makes a decision between a fast transport option to slow. **Table 14-3 Ranking of Transportation Modes in Terms of Supply Chain Performance** **(Read Vertically, 1 = Lowest 6 = Highest)** ### Example 14-2 Trade-Offs when Selecting Transportation Mode Eastern electric is a major appliance manufacturer with a Large plant in Chicago area. EE Purchase all the motors for its appliances from Westview Motors. This example helps decide on various proposals for transportation and must decide to accept the details, as they are in other proposal are given int he table below **Table 14-4 Transportation Proposals for EE Electric** **Table 14-5** Analysis of Transportation Option For Eastern Electric shows other cost associated which needs to be take in too. Also helps the managers to decide their plans Firms can significantly reduce to safey by physically Aggregating inventories in one location. For example, Amazon's focus is on decreasing facility and inventory . Barnes and Nobles must hold inventory in stores. **** The cost involved when making aggregation discussion in **Example 14-3** ### Example 14-3 Trade-offs Off When Aggregating Inventory The medical equipment is sold directly to cardiologists over North America. HighMed currently divides with US into territory. Weekly demand territory Normaly distributed, Maintain sufficient in each territory annual cost 25percent **Option A**: keep the current structure replenishment once a week rather **Option B**: Eliminte inventory in the territories where high med **Table 14-6 HighMed Costs Under Different Network Options** The value of aggregation is transportation cost that can. Demand holding coast. The lessons from this are summarized in this table: **Table 14-7 Conditions Favoring Aggregation or Disaggregation of Inventory** Table Helps understand favor conditions aggregation disaggregation #### Trade Off Between Transportation Cost and Customer Responsiveness **Figure 14-4** shows a trade Off Between Transportation Cost and Responsiveness needs The picture provided has Daily DEmand at Alloy Steel Table shows **Table 14-7 Quantity Shipped and Transportation Cost as a 8 Function of Response Times** ### Summary of Learning Objective 5 Given a supply chain goal to minimize them in the 7 and all cost. The decisions that go into the transportation costs, mode, supply chain ### Test Your Understanding **** The total amount paid to various carriers for moving products to customers is"** **○Transportation Cost** O Inventory Cost O Facility Cost O procesessing cost . What What inventory incurred network of holding is to inventory